Friedrich Merz proposes 'radical' spending package for Germany

Germany’s chancellor-in-waiting, Friedrich Merz, is under fire from opposition politicians over his “radical proposals” to relax the so-called debt brake to boost the economy and allow for higher defence spending, says Kate Connolly in The Guardian. The CDU/CSU leader’s proposals, agreed with his potential coalition partners, the Social Democrats, have variously been described as a “bazooka” and an “extremely risky bet”. Merz says they are vital “in light of the threats to our freedom and peace”.

Merz, who is in coalition talks to form a new government, which are expected to run until 24 March, wants to get his plans through the current parliament, where the conservatives and SPD have the necessary two-thirds majority together with the Greens. The far-right AfD, which will have 152 seats in the new parliament, is opposed and has already said it will challenge the decision in court. “A number of other parties have political incentives to push the vote to the brink,” says Deutsche Bank Research. It’s “far from a done deal”.

What does it mean for Germany's economy?

If Merz does succeed, it would be a “big step forward” – for Germany, Europe and the world, says Bloomberg. Introduced by former CDU leader Angela Merkel in 2009, the debt brake was “much more than a mere budget rule”. It reflected Germans’ “deep-seated aversion to borrowing and to the burden-sharing required for a viable European Union”. It has also proved to be “economically disastrous, gutting the kind of productive investment desperately needed to restart growth” in the face of higher energy prices and Chinese competition. The “geopolitical chaos” unleashed by Donald Trump has forced Germany’s hand. Faced with the withdrawal of US military support and threat of US tariffs, Merz has come up with an “ambitious fiscal agenda”. Adjustments to the debt brake will allow for much higher defence spending and another €500 billion will be dedicated to a decadal-long fund to invest in the country’s infrastructure.

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Using the outgoing German parliament to lead the country into “debt bondage” disregards the will of voters and will “accelerate Germany’s economic decline”, says Joachim Nikolaus Steinhöfel in Euronews. It will expand the money supply, “drastically worsen Germany’s credit rating” and encourage other countries in the eurozone to abandon “fiscal discipline” with a knock-on effect on bond markets and interest rates. Short-term, it might stimulate growth, but private investment will be crowded out while the state’s inefficient procurement system will waste billions. Defence spending won’t grow the economy.

On the contrary, many economists would argue that Merz’s spending spree is “just what Germany needs to get itself out of its low-growth malaise”, says Jeremy Warner in The Telegraph. The bigger, long-term question is whether a rearmed Germany will galvanise the country’s “reemergence as an over-mighty, political and economic hegemon at the heart of Europe”. Re-empowering the historic enemy is “surely not” what Vladimir Putin had in mind when he sent his tanks into Ukraine. “Yet this could all too easily be the ultimate outcome.”

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